RedHill BioPharma — Transformation to commercial/R&D spec pharma

Healthcare

RedHill BioPharma

Transformation to commercial/R&D spec pharma

Q416 business update

Pharma & biotech

6 March 2017

Price*	NIS3.55/$9.67
Market cap		NIS606m/$123m
*Priced at 2 March 2017
NIS3.63:US$
Net cash ($m) at end Q416 (including short term investments)			66.2

Shares in issue	171m
Free float	90%
Code	RDHL

Primary exchange	TASE
Secondary exchange (ADS/share 1:10)	NASDAQ

Share price performance

%	1m	3m	12m
Abs	(2.8)	(16.0)	(10.4)
Rel (local)	(5.8)	(18.3)	(13.1)

52-week high/low

NIS6.0

NIS3.4

Business description

RedHill Biopharma is a specialty pharma company with a broad R&D pipeline focusing on GI and inflammatory and gastrointestinal diseases, while earlier-stage assets also target various cancers. The most advanced products are RHB-105 for H. pylori infection, RHB-104 for Crohn’s disease and multiple sclerosis and Bekinda for gastroenteritis and IBS-D.

Next events

Second DSMB review of RHB-104 Phase III in CD	Q217
Bekinda Phase III for gastroenteritis top-line results	Q217
Bekinda IBS-D Phase II top-line results	Mid-2017

Analysts

Jonas Peciulis	+44 (0)20 3077 5728
Juan Pedro Serrate	+44 (0)20 3681 2534

healthcare@edisongroup.com

Edison profile page

RedHill’s Q416 results update showed steady progress with R&D activities and the company readying itself for commercialisation in the US, following the recently announced co-promotion deal for Donnatal. Data readouts from three mid- to late-stage clinical trials will shape RedHill’s H117, providing inflection points for the share price. Our valuation is slightly lowered to NIS1.3bn ($369m) on somewhat higher than expected guided cash burn in 2017.

Year end	Revenue ($m)	PBT* ($m)	EPS* ($)	DPS ($)	P/E (x)	Yield (%)
12/15	0.0	(21.1)	(0.19)	0.0	N/A	N/A
12/16	0.1	(29.4)	(0.23)	0.0	N/A	N/A
12/17e	0.1	(39.8)	(0.24)	0.0	N/A	N/A
12/18e	0.8	(36.6)	(0.21)	0.0	N/A	N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Financials: Ramping up R&D, financed well into 2018

RedHill reported modest Q416 licensing income of $100k (immaterial in Q415). R&D costs were $7.5m, up 51% y-o-y mainly due to increased R&D activities. G&A costs were $1.6m in Q416, down 6.9% y-o-y. This resulted in an operating loss of $9.0m versus $6.8m a year ago. Operating cash burn in Q416 was $10.1m compared to $28.2m for FY16. Following a successful $38m fund-raising in December 2016, RedHill ended the year with a cash pile of $66.2m. The company guided that quarterly cash burn in 2017 will be close to that in Q416 at c $10m, which is the main change to our FY17 estimates, decreasing operating profit to $39.9m from $33.0m. This implies cash reach well into 2018, which is comfortable given that by mid-2017 several mid- to late-stage trial data readouts will be out.

Commercial and R&D progress towards catalysts

One of the more notable recent events is a co-promotion deal with Concordia Healthcare for Donnatal (IBS/enterocolitis) in the US. The strategic importance of this deal is that RedHill aims to become a vertically integrated, commercial-stage, revenue-generating gastrointestinal speciality pharma company. Furthermore, RedHill will be able to use the established sales organisation to promote and distribute its own developed products. Looking forward, three mid- to late-stage catalysts will shape H117 for RedHill: the second DSMB review in Q217 with an early stop option for RHB-104 in Phase III for CD, Bekinda top-line Phase III results in gastroenteritis in Q217 and top-line Phase II results in IBS-D in mid-2017.

Valuation: Slightly lowered to NIS1.3bn ($369m)

Our valuation of RedHill is NIS1.3bn ($369m) or NIS7.7/share ($21.6/ADS), slightly reduced from NIS1.5bn ($378m) or NIS8.5/share ($22.2/ADS) previously. This is mainly because higher than estimated cash burn was partially offset by rolling our model forward in time. We keep all other assumptions unchanged and look forward to the upcoming R&D triggers in H117.

Key catalysts to mid-2017

RHB-104: Interim analysis in Q217 and early termination option

In October 2016, RedHill introduced an option for early termination of the Phase III study with CD patients if overwhelming efficacy or futility is demonstrated. This will be explored during the second DSMB review in Q217; the first DSMB review in December 2016 focused only on safety. If the study is not stopped, the enrolment of an expected 410 CD patients should be completed by end-2017. RHB-104 is a patented combination of three generic antibiotics (clarithromycin, rifabutin and clofazimine) for CD patients and represents a novel approach aimed at treating Mycobacterium avium paratuberculosis (MAP) infection which, according to numerous studies, can be one of the causative agents of CD.

Bekinda: Two data readouts by mid-2017

In February 2017, RedHill announced that the last patient had been enrolled to the Phase III trial in the US for acute gastroenteritis. Top-line results are expected in Q217. According to RedHill’s discussions with the FDA, this study could be sufficient to file for an NDA, assuming a clear efficacy signal is demonstrated with a favourable safety profile. Bekinda is also being explored in another Phase II trial with IBS-D patients, with top-line results in mid-2017.

Bekinda is a once-daily, bi-modal release, oral formulation of ondansetron. Ondansetron, originally developed and marketed by GlaxoSmithKline and Novartis as Zofran, is a 5-HT3 (serotonin) receptor antagonist approved for the prevention of chemotherapy- and radiotherapy-induced nausea and vomiting (CINV and RINV, respectively) and prevention of postoperative nausea and/or vomiting (on an as needed basis, not routinely). RedHill licensed the patent-protected, extended-release formulation and, if approved, Bekinda (24mg) could be the first 5-HT3 antiemetic drug indicated for the treatment of acute gastroenteritis and gastritis in the US. Although studies are at an earlier stage, the opportunity for Bekinda in IBS-D is potentially greater than in gastroenteritis, given the chronic nature of the disorder and the currently underpenetrated market due to a lack of effective drugs.

More details about RHB-104 and Bekinda, including trial design and potential analysis, are discussed in our initiation report.

R&D and commercial progress

Co-promotion deal for Donnatal in the US

One of more notable recent events is a co-promotion deal with Concordia Healthcare for Donnatal in the US, already discussed in our previous report in more detail. The strategic importance of this deal is that RedHill aims to become a vertically integrated, commercial-stage, revenue-generating gastrointestinal speciality pharma company. Furthermore, it will be able to use the established sales organisation to promote and distribute its own developed products.

Donnatal (phenobarbital, hyoscyamine sulfate, atropine sulfate, scopolamine hydrobromide) is an established product with an existing market and classified by the FDA as possibly effective in irritable bowel syndrome and acute enterocolitis. Donnatal is an established product and was acquired by Concordia in 2014, with H116 sales reaching $71m (7.7% of Concordia’s sales). In our view, the first goal is to get the margins right and set up a profitable US business and then look for growth, potentially by adding more products to the portfolio. During the Q416 results call the company indicated that the focus this year is to set up the organisation in the US and initiate promotional activities. Initial sales could be recorded as soon as in Q317.

Positive final MS data from Phase IIa with RHB-104

RedHill's Phase IIa study (CEASE-MS) of RHB-104 in relapsing-remitting multiple sclerosis (RRMS) delivered final results in December 2016 and echoed the positive interim findings earlier in 2016. During the Q416 results call RedHill noted that the focus is on CD, which is the primary indication for RHB-104, and the progress with the MS indication will depend on insights from the ongoing Phase III for CD and potential interest from partners.

In the Phase IIa trial RHB-104 was evaluated as an add-on therapy to IFN-beta1a in an open-label, single-arm trial of 18 RRMS patients (17-patient data used for modified intent-to-treat analysis; 10-patient data used for per protocol analysis) who were treated for 24 weeks in combination with interferon beta-1a and then with interferon beta-1a only. Although not powered for efficacy, RedHill published encouraging interim results from this study in March 2016 and final top-line data in December 2016. The annualised relapse rate (ARR, one of the most common endpoints in late-stage trials in the industry)1 at 24 weeks was 0.29 in the modified intent-to-treat2 (mITT) population and 0.0 in the per-protocol3 (PP) population, comparing favourably with data published for standalone IFN-beta therapies Avonex (Biogen) 0.67 and Rebif (Merck Serono and Pfizer) 0.87-0.91. Final top-line results from patients who completed the full study showed a marked improvement over historical statistics, although data were not disclosed.

A. Lavery et al. Outcome Measures in Relapsing-Remitting Multiple Sclerosis: Capturing Disability and Disease Progression in Clinical Trials. Multiple Sclerosis International. Volume 2014, Article ID 262350.

ITT: the intention-to-treat principle requires that all participants who are randomised must be included in the final analysis regardless of the treatment received, withdrawals, lost to follow-up or cross-overs. This is the preferred analysis method to avoid bias. Modified ITT allows some post-randomisation exclusions.

Per-protocol analysis is a comparison of treatment groups, which includes only those patients who completed the originally allocated treatment. If used alone, this method may lead to bias.

Another endpoint was the relapse rate during the study. A total of 93% of the mITT patient population and 100% of the PP patient population were relapse free at 48 weeks, which also compares well with Rebif alone (75%) and Avonex alone (63%).

Commercialisation agreement for Rizaport finalised

In December 2016, RedHill finalised the agreement with Pharmatronic granting an exclusive licence to register and commercialise Rizaport in South Korea. RedHill and IntelGenx (a partner) will receive an upfront payment, milestone payments and tiered royalties. The initial term is for 10 years from the date of first commercial sale, with the commercial launch expected in Q119. This is a second agreement, similar to that signed with Grupo Juste for Spain and potentially for other territories.

Rizaport is an oral dissolving thin film formulation of rizatriptan, originally invented by IntelGenx, for the treatment of migraine attacks. IntelGenx, a Canada-based oral drug delivery formulation company, and RedHill entered into a co-development agreement in August 2010. In March 2013 the two companies submitted an NDA to the FDA under the 505(b)(2) regulatory path, but received a complete response letter primarily focusing on third-party chemistry and CMC issues, packaging and labelling. The FDA did not question safety or clinical trial results, and RedHill therefore plans to address the issues and resubmit the NDA in Q317. This may substantially boost the potential of Rizaport (for more details, see our initiation report).

Exhibit 1 summarises recent updates on RedHill’s R&D and commercial pipeline.

Exhibit 1: Update on RedHill’s R&D and commercial pipeline

Product	Stage	Indication	Recent progress and upcoming events
R&D products
RHB-105 rifabutin+ amoxicillin+ omeprazole	Ph III	H. pylori infection	The first Phase III study delivered positive results in March 2016. Following a meeting with the FDA, a confirmatory Phase III is planned to be initiated in Q217 subject to successful completion of the ongoing pharmacokinetics programme.
RHB-104 clarithromycin+ clofazimine+ rifabutin	Ph III	Crohn’s disease	Passed interim DSMB review in Q416. By January 2017, 254 out of planned 410 patients were enrolled. In October 2016, RedHill introduced an option for early termination of the Phase III study with CD patients if overwhelming efficacy or futility is demonstrated during the second DSMB review in Q217. If the study is not stopped, the enrolment should be completed by end-2017.
	Ph IIa	r/r multiple sclerosis	Phase IIa study (CEASE-MS) of RHB-104 in r/r multiple sclerosis delivered final results in December 2016 and echoed positive interim findings earlier in 2016. During the Q416 results call RedHill noted that the focus is on CD, which is the primary indication for RHB-104, and progress with the MS indication will depend on insights from the ongoing Phase III for CD and potential interest from partners.
Bekinda ext. release tab. ondansetron	Ph III	Gastro-enteritis	In February 2017, RedHill announced that the last patient had been enrolled to the Phase III (GUARD) trial in the US for acute gastroenteritis. Top-line results from Phase III study expected in Q217.
	Ph II	IBS-D	Top line results from Phase II with IBS-D patients expected mid-2017.
Yeliva sphingosine kinase-2 inhibitor	Ph I/II	r/r multiple myeloma	The first patient was dosed in the Phase Ib/II study, which was initiated in September 2016 and seeks to enrol up to 77 patients.
	Ph II	HCC	Phase II initiated in October 2016 and seeks to enrol up to 39 patients.
	Ph I/II	DLBCL / Kaposi sarcoma	Phase I/II study was initiated in June 2016 and seeks to enrol up to 33 patients.
	Ph Ib	Radioprotectant	A Phase Ib study of oral mucositis in radiotherapy patients is expected to be initiated later in mid-2017.
Other R&D opportunities	RHB-106, capsules of sodium picosulphate for bowel preparation for abdominal procedures; licensed to Salix Pharmaceuticals in February 2014, which was acquired by Valeant Pharmaceuticals in March 2015. It has yet to clarify further development plans.
	Mesupron, urokinase-type plasminogen activator (uPA) inhibitor, for solid tumours; in-licensed from Wilex in June 2014, which explored Mesupron in 10 clinical studies including two Phase II studies in advanced pancreatic cancer and metastatic breast cancer. RedHill plans to initiate Phase I/II in H217 with pancreatic cancer patients who are undergoing chemotherapy after surgery.
Commercial-stage products
Donnatal phenobarbital, hyoscyamine, atropine sulfate, scopolamine	Market	IBS/enterocolitis		In January 2017, RedHill announced a co-promotion deal with Concordia Healthcare for Donnatal in the US. Initiation of promotional activities for Donnatal in selected US territories. Donnatal was acquired by Concordia in 2014 and had sales of $71m in H116 (7.7% of Concordia’s sales). During 2017 RedHill will set up a commercial organisation in the US and initiate promotional activities with the first sales potentially in Q317.
Rizaport oral thin film rizatriptan	Market	Migraine		Co-development agreement with IntelGenx in 2010. Re-submission of NDA expected in Q317. Received MAA in Europe in October 2015. First distribution agreement in Spain signed with Grupo Juste in July 2016. Second agreement with Pharmatronic granting an exclusive licence to register and commercialise Rizaport in South Korea in December 2016.

Source: Edison Investment Research. Note: IBS-D = irritable bowel disease with diarrhoea; r/r =relapsing-remitting multiple sclerosis/ refractory or relapsed multiple myeloma; DLBCL = diffuse large B-cell lymphoma; HCC = hepatocellular carcinoma; IBS = irritable bowel syndrome and acute enterocolitis.

Valuation

We value RedHill at NIS1.3bn ($369m) or NIS7.7/share ($21.6/ADS), slightly reduced from NIS1.5bn ($378m) or NIS8.5/share ($22.2/ADS) previously. This is mainly because of a higher than estimated cash burn, which is partially offset by rolling our model forward in time. We keep all other assumptions in our model unchanged, as detailed in our initiation report.

■

We do not yet include the co-promotion deal in our valuation, but will revisit it when more details emerge about the commercial set-up and the initiation of promotional activities.

■

Our model assumed the initiation of a second Phase II trial with RHB-104 for the MS indication this year and at present we leave it unchanged ahead of the interim analysis of the Phase III CD trial, which may influence the near-term fate of the MS programme. We will also revise other details of the project, such as partnering timing and success probability.

Existing funds provide cash reach well into 2018. We assume $5.0m of illustrative financing will need to be included nominally as long-term debt (as per Edison’s policy) on the balance sheet in 2018.

Exhibit 2: Sum-of-the parts RedHill valuation

Product	Launch	Peak sales, $m	NPV ($m)	NPV/ADS, ($)	Probability	rNPV ($m)	rNPV/ADS ($)
RHB-105 - H. pylori infection	2021	86	85.6	5.0	70%	57.7	3.4
RHB-104 - Crohn’s disease	2023	145	51.5	3.0	40%	12.9	0.8
- Multiple sclerosis	2025	422	187.1	11.0	20%	48.4	2.8
Bekinda - Gastroenteritis	2019	21	34.7	2.0	70%	24.1	1.4
- IBS-D	2023	201	117.2	6.9	40%	62.6	3.7
Yeliva - r/r MM	2025	565	220.9	13.0	10%	44.9	2.6
- Advanced HCC	2025	649	124.4	7.3	10%	30.9	1.8
- DLBCL	2025	156	63.4	3.7	10%	16.8	1.0
Rizaport - Migraine	Market	20	11.0	0.6	100%	11.0	0.6
							0.0
Net cash (including other financial assets)			59.5	59.5		100%	59.5
Valuation		955.2	955.2	52.5		368.8	21.6

Source: Edison Investment Research. Note: WACC = 12.5% for product valuations. IBS-D = irritable bowel syndrome; r/r MM = refractory/relapse multiple myeloma; Advanced HCC = hepatocellular carcinoma; DLBCL = Diffuse large B-Cell Lymphoma.

Exhibit 3: Financial summary

	$'000s	2011	2012	2013	2014	2015	2016	2017e	2018e
December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		23	16	12	7,014	3	101	100	750
Cost of Sales		0	0	0	0	0	0	(60)	(450)
Gross Profit		23	16	12	7,014	3	101	40	300
Research and development		(5,414)	(6,455)	(8,100)	(12,700)	(17,771)	(25,241)	(34,254)	(30,931)
EBITDA		(7,858)	(9,016)	(10,748)	(10,620)	(21,966)	(30,499)	(39,836)	(36,534)
Operating Profit (before amort. and except.)		(7,873)	(9,040)	(10,772)	(10,647)	(22,002)	(30,543)	(39,887)	(36,588)
Intangible Amortisation		0	0	0	0	0	0	0	0
Exceptionals		0	0	0	0	0	0	0	0
Other		0	0	0	0	0	0	0	0
Operating Profit		(7,873)	(9,040)	(10,772)	(10,647)	(22,002)	(30,543)	(39,887)	(36,588)
Net Interest		(7,630)	(1,286)	144	(64)	912	1,173	109	0
Profit Before Tax (norm)		(15,503)	(10,326)	(10,628)	(10,711)	(21,090)	(29,370)	(39,777)	(36,588)
Profit Before Tax (reported)		(15,503)	(10,326)	(10,628)	(10,711)	(21,090)	(29,370)	(39,777)	(36,588)
Tax		0	0	0	0	0	0	0	0
Profit After Tax (norm)		(15,503)	(10,326)	(10,628)	(10,711)	(21,090)	(29,370)	(39,777)	(36,588)
Profit After Tax (reported)		(15,503)	(10,326)	(10,628)	(10,711)	(21,090)	(29,370)	(39,777)	(36,588)

Average Number of Shares Outstanding (m)		48.1	52.6	62.4	86.6	110.8	128.5	169.0	172.0
EPS - normalised ($)		(0.32)	(0.20)	(0.17)	(0.12)	(0.19)	(0.23)	(0.24)	(0.21)
EPS - normalised and fully diluted ($)		(0.32)	(0.20)	(0.17)	(0.12)	(0.19)	(0.23)	(0.24)	(0.21)
EPS - (reported) ($)		(0.32)	(0.20)	(0.17)	(0.12)	(0.19)	(0.23)	(0.24)	(0.21)
Dividend per share ($)		0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0

Gross Margin (%)		100.0	100.0	100.0	100.0	100.0	100.0	40.0	40.0
EBITDA Margin (%)		N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A
Operating Margin (before GW and except.) (%)		N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A

BALANCE SHEET
Fixed Assets		1,450	1,533	1,739	2,837	6,318	6,397	6,386	6,405
Intangible Assets		1,245	1,345	1,555	2,615	6,060	6,095	6,130	6,165
Tangible Assets		132	113	103	146	124	165	119	103
Investments		73	75	81	76	134	137	137	137
Current Assets		17,172	17,498	12,358	26,019	60,510	67,815	32,947	1,978
Stocks		0	0	0	0	0	0	0	0
Debtors		89	198	488	3,074	2,372	1,661	1,978	1,978
Cash		14,070	16,814	11,851	5,892	21,516	53,786	30,969	0
Other		3,013	486	19	17,053	36,622*	12,368*	0	0
Current Liabilities		(513)	(1,078)	(2,415)	(1,720)	(5,514)	(5,356)	(8,575)	(7,575)
Creditors		(513)	(1,078)	(2,415)	(1,720)	(5,514)	(5,356)	(8,575)	(7,575)
Short term borrowings		0	0	0	0	0	0	0	0
Long Term Liabilities		(886)	0	0	0	0	0	0	(4,959)
Long term borrowings		0	0	0	0	0	0	0	(4,959)
Other long term liabilities		(886)	0	0	0	0	0	0	0
Net Assets		17,223	17,953	11,682	27,136	61,314	68,856	30,758	(4,151)

CASH FLOW
Operating Cash Flow		(4,691)	(6,795)	(8,436)	(12,229)	(17,826)	(28,258)	(35,145)	(35,855)
Net Interest		0	0	0	0	0	0	0	0
Tax		0	0	0	0	0	0	0	0
Capex		(136)	(8)	(14)	(70)	(14)	(85)	(5)	(38)
Acquisitions/disposals		0	0	0	0	0	0	0	0
Financing		13,838	6,550	2,280	24,369	54,792	36,017	0	0
Other		6,628	2,997	1,207	(18,029)	(21,328)	24,596**	12,333**	(35)
Dividends		0	0	0	0	0	0	0	0
Net Cash Flow		15,639	2,744	(4,963)	(5,959)	15,624	32,270	(22,817)	(35,928)
Opening net debt/(cash)		1,569	(14,070)	(16,814)	(11,851)	(5,892)	(21,516)	(53,786)	(30,969)
HP finance leases initiated		0	0	0	0	0	0	0	0
Other		0	0	0	0	0	0	0	0
Closing net debt/(cash)		(14,070)	(16,814)	(11,851)	(5,892)	(21,516)	(53,786)	(30,969)	4,959

Source: Edison Investment Research, RedHill accounts. Note: *Short-term investments. **Includes short-term investments converted to cash and cash equivalents.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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EDISON INVESTMENT RESEARCH DISCLAIMER

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street,

Sydney , NSW 2000,

Australia

Tel Aviv +44 (0)20 3734 1007
Medinat Hayehudim 60,

Herzilya Pituach, 46766

Israel

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